Earnings Call Transcript - FCF Q2 2021

Operator, Operator

Good day and thank you for standing by. Welcome to the First Commonwealth Financial Corporation's Second Quarter 2021 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Ryan Thomas, Vice President of Finance and Investor Relations. Please go ahead.

Ryan Thomas, Vice President of Finance and Investor Relations

Thank you, Pasha, and good afternoon, everyone. Thank you for joining us today to discuss First Commonwealth Financial Corporation's second quarter financial results. Participating on today's call will be Mike Price, President and CEO; Jim Reske, Chief Financial Officer; and Jane Grebenc, our Bank President and Chief Revenue Officer. As a reminder, a copy of today's earnings release can be accessed by logging on to fcbanking.com and selecting the Investor Relations link at the top of the page. We have also included a slide presentation on our Investor Relations website with supplemental financial information that will be referenced during today's call. Before we begin, I need to caution listeners that this call will contain forward-looking statements. Please refer to our forward-looking statements disclaimer on Page 2 of the slide presentation for a description of risks and uncertainties that could cause the actual results to differ materially from those reflected in the forward-looking statement. Today's call will also include non-GAAP financial measures. Non-GAAP financial measures should be viewed in addition to and not as an alternative for our reported results prepared in accordance with GAAP. A reconciliation of these measures can be found in the appendix of today's slide presentation. And with that, I will turn the call over to Mike.

Mike Price, President and CEO

Thanks, Ryan, and welcome everyone. Our net income in the second quarter of $29.6 million produced core earnings per share of $0.31, a core pre-tax pre-provision ROA of 1.82% and a core efficiency ratio of 53.21%. Importantly, pre-tax pre-provision net revenue of $42.9 million was slightly ahead of the consensus estimate reflecting good underlying second-quarter momentum in our key businesses. Lending rebounded in the second quarter increasing year-to-date loan growth to 5.3% annualized rate, and that excludes PPP loans. The loan growth was broad-based, and although indirect lending and corporate banking led the way, mortgage, brand space consumer lending, and small business all contributed meaningfully. Our corporate bank had several big wins and is seeing deepening pipelines. Blocking national trends, our branch team has originated $209 million in home equity loans year-to-date, which represents a 12% increase year-over-year. Geographically, Ohio continues to lead the way with the majority of our loan growth, although PA production remained strong. Our regional business model and a focus on execution have been key elements in driving balance sheet and fee income growth. We have also brought on some talented lenders from large competitors over the last year. Consumer and small business household growth helped to fuel non-interest income, which remained strong at $26.1 million even as mortgage gain on sale income tapered. Card-related interchange income at $7.4 million was a quarterly company record by a wide margin. $2.7 million trust revenue was a quarterly record as well. Our SBA business contributed $1.6 million to gain on sale income, and SBA pipelines have never been stronger. This is four quarters in a row of strong contribution by the SBA business. Importantly, in this discussion around growth, business conditions in the second quarter and our markets recovered faster than we anticipated, and our business customers are generally positive about the outlook ahead. Expenses remain well controlled, and the core efficiency ratio was an impressive 53.21%. Over the last six years, First Commonwealth's revenue base has broadened considerably. With significant investment in new commercial lending teams, a de novo mortgage business, indirect lending, SBA lending, credit card, and new digital platforms to include online loan and deposit account opening. We have also expanded our footprint through five strategic M&A opportunities. Even as we've made these significant investments and transformed our company, at the forefront of our planning is adhering to the core principle of maintaining positive operating leverage. Turning to NIM, Jim will provide important detail in a few minutes, but at a very high level, I believe our NIM is benefiting from our long-term approach to building a diversified loan portfolio that's balanced between commercial and consumer loans. At a time when banks are struggling to deploy excess cash, our consumer loan growth has been strong all year, and our commercial loan growth picked up as the second quarter progressed. We like the contribution margin a new consumer loan brings versus having money parked at the Federal Reserve or in investment securities. We also have the potential of cross-selling to the new consumer customer as an added bonus. We're enthused about the lift out of an equipment finance team from a larger institution that we recently announced as well as the momentum in our SBA business. Both of these businesses are scalable and will enable our margin to expand by generating higher yielding assets. Importantly, we're very pleased with the adoption of our new digital platform. In the second quarter, our active mobile users increased at an annualized rate of 22%. Additionally, we continue to bring new capability forward and will be introducing a new mobile and mortgage platform in August where our customers can easily apply for and track the mortgage status from anywhere at any time. Lastly, regarding credit, we feel our asset quality is solid, and coupled with improving economic conditions, we expect credit to be a tailwind in the back half of the year. And now, I'll turn it over to Jim Reske, our CFO.

Jim Reske, Chief Financial Officer

Thanks, Mike. As Mike already mentioned, we were pleased with our financial performance this quarter, especially with regard to loan growth, fee income, and expense control. Hopefully, I can provide you with a little more detail on our NIM, asset quality, fee income, and expenses. Our net interest margin for the second quarter was 3.17%, down from 3.40% last quarter. Loan yields fell by 11 basis points, but we were able to offset most of that by reducing the cost of interest-bearing liabilities by 7 basis points. But to understand our NIM, you have to look at the effects of PPP and changes in our asset mix, especially cash. For example, we began the quarter with $479 million in PPP loans; by June 30th that figure had shrunk to $292 million. Similarly, excess cash dropped from $414 million to $189 million over the period. These changes don't come through if you only look at our published average balances, which barely moved. Essentially, what happened is this: We started the quarter with a lot of excess cash because of government stimulus programs that took place in the first quarter. In addition, PPP loans were forgiven over the course of the quarter generating even more cash. We invested some of that excess cash into securities early in the quarter and then a strong loan growth toward the end of the quarter. To be more precise, PPP and excess cash had two distinct effects on the margin. The first quarter NIM had the benefit of $7.9 million of PPP income, while second-quarter PPP income was only $5.5 million. Second, we put excess cash to work by purchasing approximately $300 million of securities in the second quarter. That's better than leaving it in cash. Those investments will generate about $3.9 million of net interest income annually, or about $0.03 per share, but they still yield less than what we were earning on the PPP loans, and it's still a layer of thin margin assets on top of the balance sheet that drags down the NIM. Because of the noise from PPP and excess cash, we have been publishing a core NIM that adjusts for both of those things. Our previous guidance was for our core NIM to fall between 3.20% and 3.30%, and our core NIM for the second quarter came in at 3.20%, which was within that range albeit at the bottom of that range. The reason for that is simple math; the more excess cash we invest in securities, the less cash there is to adjust for in the core calculation. The good news here is that our loan growth in the second quarter was very strong, especially towards the end of the quarter. That will help the margin going forward. We expect to maintain that trajectory for the remainder of the year. We should replace PPP runoff and further soak up excess cash to the benefit of the margin. As a result, we are reiterating our core NIM guidance of 3.25% plus or minus 5 basis points. Let me switch gears now to asset quality and offer a couple of thoughts that may be helpful to you. First, we realized that deferrals were the number one topic a year ago, but our deferrals have all disappeared from a peak of over $1 billion during the pandemic to $138 million last quarter to only $59.5 million this quarter or just 88 basis points of total loans. Second, non-performing loans are just 0.82% of total loans, excluding PPP, and the reserve coverage of non-performing loans is 182.9%. These are levels that we believe compare very favorably to peers. Third, we just completed our regular semi-annual auditing process in which we review every commercial credit in excess of $350,000. This involved a review of about a thousand relationships totaling $2.4 billion out of the $3.9 billion commercial loan portfolio. At the conclusion of that exercise, there were zero downgrades to special mention or substandard in the portfolio. The thoroughness of that exercise gives us confidence as we took note of declines in both special mentioned and classified loans this quarter. Classified loans, for example, dropped from $72.3 million to $56.2 million, a level very close to the pre-pandemic level of $52.5 million at the end of 2019. Fourth, delinquencies, which are sometimes seen as an early warning sign of trouble ahead, not only went down from last quarter, but they are at an all-time low for our bank of just 11 basis points of total loans excluding PPP. Fifth and finally our reserves remained at 1.50% in total loans excluding PPP, protecting our capital and our earnings stream going forward. As for fee income, even with mortgage income slowing down a bit in the second half, we anticipate being able to sustain the pace of $26 million to $27 million per quarter in non-interest income for the remainder of 2021 due to favorable trends we're seeing in SBA, swap, and trust income. Turning to expenses. NIE came in at $51.5 million in the second quarter, down slightly from $51.9 million last quarter. Our previous NIE guidance was $52 million to $53 million per quarter, so we've been comfortably below that. We do, however, expect some expense associated with returning to a more normal work and travel environment, elevated hospitalization expenses that we have been seeing, new hires in revenue-producing and credit positions, and the newly announced equipment finance effort, bringing our NIE guidance to $53 million to $54 million per quarter for the remainder of the year. Finally, we repurchased 72,724 shares in the second quarter at an average price of $13.95. And with that, we'll take any questions you may have.

Mike Price, President and CEO

Thanks, Jim, questions operator.

Operator, Operator

And your first question is from the line of Michael Perito with KBW.

Michael Perito, Analyst

Hi, good afternoon guys.

Mike Price, President and CEO

Good afternoon.

Michael Perito, Analyst

I had a couple of questions. Obviously, it was good to see some of the revenue momentum come through in the quarter. And I was wondering more specifically on the loan growth side, I know you guys provided some updated broader commentary for the back half of the year, but do you think the mix will shift more dramatically towards commercial? Or do you think that the consumer portfolios could be the larger driver of the growth for the near future here until kind of line utilization recovers to a more normalized rate?

Mike Price, President and CEO

I would like the pipelines we're seeing to spike in the corporate bank, and we think growth there could continue and pick up perhaps a little bit. On the retail side, most of the execution and our branch-based team has really moved the needle this year and grown the business, as well as in our indirect business, it's really expanded into new markets, primarily Ohio, and benefited those markets well. I think it'll probably be pretty equally - maybe with a little tilt towards retail. Now, that's speculation, but it's good to have a lot of ores in the water to generate growth, and that's what we had this past quarter.

Michael Perito, Analyst

And on that point, with the equipment finance platform, I know you guys have provided some general thoughts around where what direction it could head. But I was curious if you could give more of us a better sense for us around timing in terms of how long the ramp-up process for that type of platform can take. I mean, for example, are there any non-competes or anything of that sort like hiring a traditional commercial lender that we should be mindful of, or can you pretty much start originating these loans immediately after bringing him on board?

Mike Price, President and CEO

Yes. There's no non-compete; this was a lift that we didn't purchase an equipment finance or leasing business. We really expect that in the second half or towards the end of the next year, we'll be breakeven in that business. And then the following two years could be very accretive for us to our profitability. And I'm not – we're not ready to give you a number. We obviously have internal forecasts. We'll see how the build-out proceeds with a very confident professionals who has led the same team for the last 17 or 18 years. But we're not doing this to make $3 million to $5 million. We're doing it to make a lot more money than that. So we're pretty enthused about that business, and it has our full attention. In fact, it's probably at the top of our list in terms of businesses that can really continue to transform our company. We have had some success as you know with mortgage reinvigorated and indirect SBA, and really doing de novo type things and introducing them to our business. So we're excited about it.

Michael Perito, Analyst

Great. And then just last question from me and then I'll let someone else jump in. Just on the– Mike, I was wondering if you could just give us any updates on capital deployment front and maybe more specifically just on the M&A environment. It's been a pretty active quarter. It seems like there's pretty good deal flow. Just curious how the pipeline looks and if there are attractive opportunities out there potentially for you guys to explore.

Mike Price, President and CEO

There could be – price is important. Jim likes to remind me that we've looked at now 50 things to do five. So we're pretty picky, and we want to make sure that it's financially sound and it's also very strategic and makes us a better company. And it's also strategic or accretive not just to our earnings per share but profitability of the bank's overall profitability. So there is increased activity and there are opportunities in front of us, but we've looked at a lot of things over the years. Hopefully, that's helpful. We're excited about M&A, I think, and perhaps the opportunity to do deals, but they need to be right.

Michael Perito, Analyst

Yes. And can you just – sorry, but just remind us kind of what your target box kind of looks like on the M&A front from a size and geography standpoint?

Jim Reske, Chief Financial Officer

Yes, sure. So we think about – I guess first geographically, we want things that are in a contiguous footprint that drive that kind of footprint. We look at overlap deals that are within our geographies, and we've had great success with these markets extension deals into near Metro areas, but we look at all those types of deals. In terms of size, the old rule of thumb is always 20% to 30% of your asset size was the right fit. For which much larger than NOE has which we would consider that has its own integration challenges much smaller and that it's not accretive enough. I think as a company, what we've done, what we've shown is that we are going to look at some of those smaller deals if they move the needle appreciably for us if they have the right kind of business mix, if they have the talent they get into right kind of geography, we would look at the smaller deals and we often have those conversations. So we're happy to do that. I guess, in general, comment in M&A, we believe we have a really bright future and a lot to offer. So, we believe we can fold in other companies and make them a part of the success story very effectively.

Michael Perito, Analyst

Great. Thank you guys for taking my questions. I appreciate it.

Jim Reske, Chief Financial Officer

Thank you.

Operator, Operator

Your next question is from the line of Steve Moss with B. Riley Securities.

Steve Moss, Analyst

Good afternoon. Maybe just starting with the loan pipeline and I hear you, Mike, in terms of just a thing, the deepening pipeline, kind of curious as to what you're securing, seen for pricing and competition, and just kind of maybe translating some of that into loan growth here?

Mike Price, President and CEO

Just a little different, the assumption is there is an RFP in every deal and sometimes there is, and we have to compete. A lot of times in lending particularly in the smaller and the mid-size it’s just a matter of execution and being in front of your customer or in front of a prospect. So I would say on the small business side, we have nice SBA pipelines. Our corporate bank has really helped there, and it's just the way a credit enhancement to get a deal done. We're seeing a good pipeline in our SBA lending. In our commercial real estate and C&I, again deepening pipelines, I would say that you have to compete on price. You really don't want to compete on credit quality. If anything probably at the onset we've tightened some guidelines, quite frankly, and we don't want to compromise there. And then we really have a regional business model where we empower regional presidents to go at. We have P&Ls and regional metrics on their market. And they go out and compete, and we make calls with them, and it's a lot of fun. I don't know that I have a lot to add other than we feel like we have good momentum in our commercial bank and in our retail bank; we're taking a lot of calls, and the HELOC business is very good right now.

Steve Moss, Analyst

Okay. That's helpful. And then in terms of this, where we're a new origination yield for the quarter. Apologize, if I missed that?

Jim Reske, Chief Financial Officer

Yes. It depends on the asset category. Some of the consumer categories are in the high-2s, like in direct auto; mortgages are in the low-3s; the commercial categories are generally in the low-to-mid-3s for the origination yields.

Steve Moss, Analyst

Okay. That's helpful.

Jim Reske, Chief Financial Officer

Does that help?

Steve Moss, Analyst

Yes, that does. Thanks Jim. And then maybe just on the provision here and just kind of how to think about trends going forward. Just kind of curious, I know you guys indicated in the release that growth drove it during the productions quarter but just kind of curious as to how – how you guys think about the reserve ratio as we go through – go for the next six months in support?

Mike Price, President and CEO

We believe that with our credit quality what we've seen in the migration and key categories like class of planning criticized, which has been good the last quarter, the pressure will be off of it there and that notwithstanding migration, which we're seeing migration go the other way in a positive way. I think that there'll be less pressure certainly, and you want to call it charge-offs. And this quarter, the charge-offs were 3.9, that was mostly one credit, otherwise, we would have had a very low charge-offs quarter, but it's truly in line with our expectations in the past four or five quarters. And do you want to cover charge-offs and we will probably – we feel we're a little bit at the higher range of the loan loss reserve to total loans and we have good coverage. So, that would really point to less pressure and maybe credit being a tailwind in the second half of the year.

Steve Moss, Analyst

Okay. I mean, are there some – maybe some overlays project that you guys are keeping that you want to wait for things to get a little bit better for that reservation, maybe to get back towards that day one reserve?

Mike Price, President and CEO

Steve, I'm having a tough time hearing you.

Steve Moss, Analyst

Sorry. Maybe just like in terms of just the reserve ratio, just kind of like how you think it could maybe bottom out? I mean, I realize you guys didn't adopt CECL till later to just kind of trying to think about how to get towards a lower ratio longer term?

Mike Price, President and CEO

I think it'll naturally try to revert to the mean as – with our peers, I suspect, and your asset mix is a little different. And Jim, I don't know if you want to add anything?

Jim Reske, Chief Financial Officer

I think Mike covered the basic dynamics of provisioning expense quarter-to-quarter, which oddly enough just having changed even as it seems so, you're covering your charge-offs and covering your loan loss you're providing for future loan growth. We're really pleased that our reserve current ratio has held up as high, and I think what we're experiencing, I think a lot of banks are like that was loan into that kind of reserve coverage ratio. So as opposed to the whipsaw of building up a big reserve under CECL, then releasing it, then having to build it again, what every bank would like is their ability to grow into that ratio. We don't have a target. I know you mentioned in the day one, but we don't have a target to get back to day one in lease reserves to drive it down to that. We just – we have an obligation while we want to make sure that we have adequate reserves based on what we see in the portfolio and based on our economic forecast and all the rest. If it plays out like I just said, and the loan growth continues the way it's going and the economy keeps improving, we probably will get back down to those ratios, but hopefully I think that has time and not some being massive release that puts you just at risk of having to provide for that again. Hopefully that's a little bit of a helpful commentary for you.

Steve Moss, Analyst

That's all helpful. I appreciate it. Thanks very much.

Mike Price, President and CEO

Thanks, Steve.

Operator, Operator

Your next question is from the line of Russell Gunther with D.A. Davidson.

Russell Gunther, Analyst

Hey, good afternoon guys.

Jim Reske, Chief Financial Officer

Good afternoon.

Russell Gunther, Analyst

Hey, I wanted to follow back to the question on the equipment finance list out, and maybe just the volume and rate impact. So on the volume side, you guys have been targeting a mid-single digit rate successfully executing there. As this matures, this business line that you see is accretive to that growth rate or more of a mix shift and recommitting to a mid-single digit growth? And then on the rate side, does this represents upside going forward to a 3.20%, 3.30% near-term core NIM guide?

Jim Reske, Chief Financial Officer

I think yes and yes, we do see it as accretive to our net interest margin. And we do see it as an opportunity to boost growth, and the guidance we've given is mid-single digits, and notwithstanding the pandemic, we really felt we would be at the high end of the range. We feel that this could provide another boost and really complement a very capable commercial banking franchise.

Russell Gunther, Analyst

Yes. Got it. Okay. And then in terms of the expense guide change, how much of that increase on a quarterly basis is driven by the equipment finance team? You mentioned a few other drivers, but that’s the bulk of it?

Jim Reske, Chief Financial Officer

Yes. Well, the equipment financing is just starting. So the early days of the equipment finance in our projections would be $1 million and $1.5 million a quarter. Probably by the time it's all said and down, when it's really humming, expense will be about $2 million a quarter, but that'll more than pay for itself once it passes a breakeven point. It'll very much pay for itself and lend some past that point. So it's not that we just – they just came on board. We're really happy to have them there. We're building up systems, it's building up the internal control and all the things we have to do, a lot likely to do with mortgage. We do expect to book some assets by the end of this year. That's why we are being a little conservative on the breakeven point being towards the end of next year. We want to get to earning assets on the books as soon as we can to kind of help that effort pay for itself.

Russell Gunther, Analyst

All right, Jim, thank you. And then, Mike, I understand you guys don't want to put too fine a point on it right now, but you mentioned, not doing it to make $3 million to $5 million. I mean, that sounds like a net income type of number, which is about a nickel on the high side. Is that the way to think about it? Or how should we stay tuned for earnings accretion?

Mike Price, President and CEO

I think multiple of that. Yes, absolutely. We'll give you plenty of guidance as we go on. We have multiple quarters in quarterly calls before we get to that point. So we find that guidance as we go. But yes, ultimately eventually passed out, it should be more accretive than that. If we look at this a little bit like the mortgage business where ultimately three, four, five years down the road, it gets to be 10% to 15% of your balance sheet and is really filling off some really healthy income.

Russell Gunther, Analyst

Makes sense. I appreciate it guys. And then just last one on the expense side of things; you had a lot of success with the initiatives that you put in place getting those cost saves out. And have you given any thoughts into the back half of this year or as you're thinking about budgeting for 2022, revisiting branch rationalization or any other potential expense initiatives?

Mike Price, President and CEO

Not right now. It's pretty fluid; we look at it as Russell quarter-to-quarter and now into the planning season for 2022. And if the key principle and we've been able to maintain positive operating leverage despite a slow investment we promised earlier in each of those discretely was akin to the equipment finance business, we're spending $3 million to $5 million plus to really build out platforms. And we figured a way to cover for them, and that's what we have to do. We also have to continue to make investments in digital and we have another product I mentioned earlier, the blend mortgage solution, which will be terrific. And we're still bullish on that business. We just had great producers. It's good for the brand. We get new households, and we cross-sell them. So even though mortgage is tapering, it's an important part of our company now.

Russell Gunther, Analyst

Understood, Mike. The positive operating leverage so it's great to see from the prepared remarks. So at least it sounds like a commitment to do that amid this continued franchise investment. So is that the message to take away going forward?

Mike Price, President and CEO

It is. It is. And I know if we had to take in a given quarter, you're going to remind us of that and we'll try not to.

Russell Gunther, Analyst

Fair enough. Okay. Thanks for taking my questions.

Operator, Operator

Your next question is from the line of Steven Duong from RBC Capital Markets.

Steven Duong, Analyst

Hey, good afternoon guys.

Mike Price, President and CEO

Good afternoon, Steve.

Steven Duong, Analyst

Hey Jim, it looks like the liquidity has slowed a little bit on the period-end balance sheet. Is it fair that when we look at the average deposit balance next quarter, that it could be perhaps flat to down and your cash and securities could perhaps be soaked up a little bit with loan growth?

Jim Reske, Chief Financial Officer

Yes. I missed a little bit of what you said, Steve, but if I get the gist of it, you're asking about trends in deposits and securities, is that right?

Steven Duong, Analyst

Yes, between – because obviously, this quarter average deposits jumped up, liquidity jumped up, but then I noticed your period-end balance sheet, it looks like that has kind of been played out and maybe heading into the third quarter, the liquidity that we've been seeing has kind of leveled off.

Jim Reske, Chief Financial Officer

Yes, I think that's right. And I'm glad you picked up on that because it was a bit of an odd quarter to decipher from the numbers you mentioned that what you're looking at, the period-end figures barely moved, but the averages were up, and really that's because of this big influx right towards the end of the first quarter with the last federal stimulus program. But I would say overall, yes, we do think the deposit bounce probably leveling off. One of the big questions is whether the PPP loans that convert into cash, they're in customer accounts and you see the sellers, whether there'll be a rush of spending to withdraw some of that money. But basically what we plan on and what we expect is that deposit base to be relatively stable from here. We also expect the securities portfolio to be relatively stable for the rest of the year. And we don't expect to take a lot of that extra cash. And the positive securities will probably repurchase securities to replace runoff, of course, even out of the market of securities for the last couple of weeks when the purchase opportunities for putting them into mortgage-backed securities, where 1% even is very unappealing; it's come up a bit since then. So it's a little bit better, but we try to stay out of the market when it's good to do that. But overall we are much more excited about the loan growth prospect as a way to soak up the excess cash and the excess deposits. That's the way we see the setting up playing out.

Steven Duong, Analyst

Got it. And I guess, with all this liquidity, I guess the one thing you could do is just buy more of your stock back, is that – are you kind of more open to that? If you still have this liquidity?

Jim Reske, Chief Financial Officer

We are. The stock repurchase had never really been driven by liquidity. It's more driven by our – it is a liquidity question. We don't really think of it that way. We think of it more as a capital planning exercise. And so we have been taking a fairly non-aggressive approach, having a slow approach as we get as we just retain more earnings and for the second half and capital levels build, it really becomes more of a capital management tool to get to deploy the excess capital. And so we could pick up the pace a little bit in the second half, but right now the plan is to kind of maintain the slow, steady pace so far.

Steven Duong, Analyst

Understood. And then just on your PPP balances right now, I guess it's kind of hard to tell, but do you think you'll have the majority of those balances be forgiven in the third quarter or the fourth quarter?

Mike Price, President and CEO

We think that ultimately 90% of the total will be gone by the end of the year that will remain PPP balances somewhere between $100 million and $115 million by the end of the year. There was this pause in the forgiveness programs driven by the way the SBA was beginning PPP loans in the second quarter. That was part of what makes the slowdown in forgiveness rates in the second quarter, but it really picked up again towards the end of the quarter. And so most of the round one now, as most of its already been forgiven and we expect that the round two will follow the same kind of pattern. Most of it will be forgiven by the end of the year.

Steven Duong, Analyst

Great. Thanks for that. And then just on the loan growth in the quarter, I guess, residential and auto were pretty strong. How are you guys feeling about those two segments for the second half of the year? And then also your C&I ex-PPP that kind of looks like that's bottomed out as well. Are you seeing that kind of starting to turn as well?

Mike Price, President and CEO

Yes, it is. Some of the launch there was in this that is turning. The commercial real estate was a little ahead of it; commercial solutions, which is a smaller portion of C&I. We're already seeing a little – some nice little growth there. So that is beginning to turn. And then I think my first question is just about the indirect business and our expansion into Ohio is really driven that. The team has done a nice job of getting in front of dealers. They're often getting four claims from that and other commercial business from that as well. And they really are having a good credit experience, and we have had. Just remind you through the great recession, our indirect business performed very well. We scaled it a bit, but our credit underwriting is pretty discerning. And if anything, at the onset of the pandemic, we tightened our standards a bit there. So we feel good about these portfolios and how they will endure.

Jim Reske, Chief Financial Officer

If I could just add to that, Steve, if you don't mind. One thing that gives us confidence about C&I growth towards the second half is to grow so you don't see getting to publish financials and growth and commitments, but we had a really strong growth in commitments in the second quarter. And what happened was turned into – a decline in the utilization rate. And so even though the total C&I loan balances only didn't go up that much, the growth in commitments for the quarter was $124 million. So we see that really paving the way. And again, it gives us confidence that it’s a timing issue as that gets drawn down the second half experience that when we welcome C&I.

Steven Duong, Analyst

Yes. That's good to hear. And I guess maybe just jump back on the auto; it's been pretty strong. I thought it would kind of leveled off a little bit, but it's still pretty strong. There's no issues with – I don’t know that chip shortage or anything like that. Are you still kind of bullish on it?

Mike Price, President and CEO

Yes, we are. A lot of the really adept dealers are finding a way to do some distant time, and it's surprising how resilient they've been. Some of the old school dealers, it's been a little harder on. I think it's just kind of a little obscure, but I think the Manheim used car index back in the middle of June, I think we've peaked at prices, and we're starting to come off of those a little bit. So that probably pretends well for whatever distance. And steadier volumes, it’s been like, I don't know, it's been more uninterrupted than we thought it would be despite the inventory shortages.

Steven Duong, Analyst

That's great to hear. And then just last question, your equipment leasing put the list out, I guess if you were – this is coming on board, if you were to look back and see some of the other segments that you've gotten involved with, how do you see the equipment leasing portfolio comparing to those other portfolios that you've been involved with through the years? Do you see it really being up there compared to those other portfolios or in line? This is overall like growth and profitability.

Mike Price, President and CEO

I think it will be very profitable. And I think it will – we can grow it. I think we can have substantial, meaningful business for our company.

Jim Reske, Chief Financial Officer

Yes, I'll just echo one thing I mentioned before about its place in our company, that I think that gets to your question of being a part of the overall pie chart of the business. I think slice being 10% or 15% of pie chart in terms of balances. But it's a more profitable business than a lot of other businesses we do. So it will be nicely accretive to margin, the yields are higher; they are efficient businesses, they’ve got the efficiency ratio. We're excited about that business as it grows.

Steven Duong, Analyst

Great. That's it from me. Thank you.

Mike Price, President and CEO

Thank you.

Operator, Operator

Our final question is from the line of Matthew Breese with Stephens Incorporated.

Matthew Breese, Analyst

Hey, good afternoon.

Jim Reske, Chief Financial Officer

Good afternoon.

Matthew Breese, Analyst

Just a few from me. First, what types of equipment are going to be underwritten by the new team? Is this large ticket, small ticket, yellow metal? What is it?

Jim Reske, Chief Financial Officer

It's small ticket initially.

Matthew Breese, Analyst

Okay. Can you be any more specific there? Is it small ticket, like office equipment or something else? And what are the kinds of typical loan terms that you might get on?

Jim Reske, Chief Financial Officer

Yes, these will be through vendor programs, and this will include everything from small ticket leasing, or I mean, it could be landscaping, it could be office, it could be really tools of manufacturing forklifts. Surprisingly if we go to some of our middle-market clients, invariably we might have five or ten million that they will have between that small equipment that runs the plant and another $0.5 million in leases. It will be for some programs like that as well.

Jane Grebenc, Bank President and Chief Revenue Officer

Okay. Could you, I'm sorry, just clarify, it's not primarily office. I think you are alluding to that. It's, as Mike mentioned, transportation equipment, manufacturing equipment, those are not primarily office equipment.

Matthew Breese, Analyst

Okay. Are we just providing an example? Thank you for clarifying. And then what are the typical kind of spreads and terms on this?

Jane Grebenc, Bank President and Chief Revenue Officer

The yields are in the 4.5% to 5.5% range, pretty consistently, and that's pretty consistent through economic cycles. So, that's why we're fairly confident that it will be immediately accretive because the yields are very attractive.

Matthew Breese, Analyst

And do you have an idea of historical loss content from the producers?

Jane Grebenc, Bank President and Chief Revenue Officer

Yes. If you give us a few minutes, it's fairly – it’s reasonable; it's probably a little higher than our loss now. Let me get that for you.

Matthew Breese, Analyst

Sure, so, I'll ask my follow-up question. How much of the balance sheet at this point is floating rate and without floors, just want to get a sense for if and when we do see a Fed hike, how quickly we might see some of your loan yields respond?

Jane Grebenc, Bank President and Chief Revenue Officer

Yes, loans we have about 50% that reprice and about 50% are fixed and that's by design. We've been higher on the fixed and then we've just – we might get fifty-fifty.

Matthew Breese, Analyst

Okay. And then my last one is if I strip away PPP this quarter, core NII up sequentially feels like we've inflected, kind of the bottom was last quarter. As I think about the outlook, right, good loan growth, it feels like the core NIM can expand. Could you provide any color on core NII and kind of the outlook there? Maybe provide some guardrails as to how we should be thinking about it over the next six to twelve months?

Jane Grebenc, Bank President and Chief Revenue Officer

I think, well, first of all, Matthew I got your answer on the charge offs, normalize charge off in this business is about 55 to 75 basis points. So that's going to be probably higher than earnings of total business that the yields would make up well.

Matthew Breese, Analyst

Okay. Thank you.

Jane Grebenc, Bank President and Chief Revenue Officer

And it's a great question. Thanks. We'll get more clarifying color as we go along. The spread income kind of – it's a little bit just to continue the story you were just telling, we could see that as a big story of stability and maybe some growth potential because of the changes in the asset mix. Just to get better in the assets on the balance sheet. We'll try to get some clarity as to stripping our PTP and how that affects that because we still have a lot of PTP fee amortization to recognize or recognize a lot of that in the second half. The core, like you were talking about, the core without PTP seems to be a story of stability with some growth potential in the second half. Some of that story will depend on the rate environment. Obviously, we're all watching the 10-year headline treasury weighted 1.25%. For us I know this, you weren't asking this question directly, but it's implied in your question. For us, we have very little as a company tied to the tenure rate. For example, if you look at the middle part of the curve, the two and three-year part of the curve, this isn't getting as much attention that that's actually higher than it wasn't March 31. And that indirect auto production is all tied to that part of the curve. So, there's, some of us have very much, obviously the rate environment plays a part in our expectations toward NII trend, which was the core of your question. But it's not as penalizing to us as we might think, just looking at the headline tenure number.

Matthew Breese, Analyst

Got it. Okay. Well, I appreciate that. Thanks for all the color.

Mike Price, President and CEO

Thank you.

Operator, Operator

At this time, there are no further questions. I would like to turn the call over for any closing remarks.

Mike Price, President and CEO

Thank you, operator. As always, we appreciate your interest in our company, and we look forward to being with a number of you over the course of the next three to six months. Thank you so much.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.